Family offices and wealthy families with trusts have to deal with a second taxpayer with its own rules - how are fees deductible for trusts?
Family offices and wealthy families with trusts have to deal with a second taxpayer with its own rules - how are fees deductible for trusts?
A trust’s investment bill may include both deductible and nondeductible services.
Basically, a trust is treated in the same manner as an individual for purposes of distinguishing trade or business expenses under §162 from investment expenses under §212, with several specific exceptions.
An estate or nongrantor trust may deduct qualifying administration costs that would not have been incurred if the property were not held in the estate or trust. Those costs are deducted in arriving at adjusted gross income.
The question is the service provided. Calling a charge a “trustee fee” does not decide the result.
Ordinary investment advice is commonly or customarily purchased by an individual who owns the same property. Its treatment does not change merely because a trust pays the bill. Miscellaneous itemized deductions remain disallowed under current §67(h). What is allowed as a deduction?
• Fiduciary income-tax return preparation and certain estate-related returns can qualify.
• Probate court costs, fiduciary bond premiums and costs related to fiduciary accounts can qualify.
• An appraisal for a required trust distribution or fiduciary tax return can differ from an appraisal for insurance.
• Investment-advice charges may qualify only to the extent of a special incremental cost meeting the regulatory standard, beyond what an individual investor normally would pay.
It is common for financial institutions and trust companies to bundle trust-related and investment-related services into a single fee.
Bundled costs generally must be allocated. For a bundled fee not computed hourly, the regulations ordinarily require separating the investment-advice portion; the remaining portion receives different treatment. Separately assessed charges, out-of-pocket expenses and payments to third parties have their own rules and cannot simply be absorbed into that exception.
A reasonable allocation may consider the property receiving investment advice, comparable outside fees and the fiduciary’s attention to investment work versus beneficiaries, distributions and other fiduciary functions.
The provider’s work and the taxpayer that incurred the cost determine the deduction. An allocation supported by the actual services separates the qualifying fiduciary work from the investment advice.
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